Greece Needs Deflation to Be Saved: Economist

Greece needs to go through a period of deflation to return to competitiveness and ensure sustainable growth, John Sfakianakis, group chief economist at Banque Saudi Fransi, told CNBC Friday.

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Greece's lack of competitiveness is a major issue that is not being addressed and it, coupled with the burgeoning debt, could stall the country's return to growth considerably, Sfakianakis said.

"Right now in Athens coffee is going for 4 euros, so you cannot have a competitive economy when you are charging everybody an arm and a leg. Deflationary economics have to set in, in order for Greece to become competitive," he said.

Greece recently announced that it would take more austerity measures to ensure it meets 2011's deficit-cutting measures, after it admitted it will miss this year's target under its bailout program with the European Union and the International Monetary Fund.

Greek debt is seen rising to 153 percent of gross domestic product next year from 143 percent currently.

"If you have that kind of a debt and that is going to rise, recession in Greece will continue through 2012, then you have a major problem," Sfakianakis said.

Meanwhile, the government has problems with tax revenues because the taxable income of companies is shrinking, he said. Plus it is yet to get to grips with effective and correct tax collection, he added.

"In Greece it is probably the pastime of every Greek to evade taxes, the government will not be able to manage over the short term to correct this problem," he said.

But Sfakianakis added that Greece is better off for having been within the umbrella of the EU and the euro zone.

The debt crisis sweeping through the European Union is partly due to a crisis of leadership in the region and proper management could have avoided the worst of the problems, he said.

"At the core of this problem there is a crisis of leadership in the EU. The French are good, they're capable, but they're not the biggest. The Germans want to lead, but they're not willing to lead," Sfakianakis said.

The Germans have to be "very careful" with their rhetoric over the crisis, he said referring to comments make by Chancellor Angela Merkel earlier this week. Merkel said that some of the cost of bailing out countries at risk of default should fall to the bond holders of that government debt. The move sparked a rise in bond yields for periphery euro zone countries as investors balked at the prospect of taking a haircut.

"The Greek crisis could have been avoided had the Germans stepped in faster and had the Germans censored themselves a little bit better," he said.

Poor leadership is not the only problem affecting countries like Greece and Ireland, Sfakianakis said. But the two economies are suffering from different economic problems, he added.

"In Ireland (it's) a crisis of the banks and the private sector, overleveraged, excessive and in Greece it's the crisis of the state. The state being overblown, inefficient, very ineffective and incapable of managing the problems that they have," he said.